SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly period ended June 30, 1998.
--------------
Commission file number 000-24478.
DEARBORN BANCORP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-3073622
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22290 Michigan Avenue, Dearborn, MI 48123-2247
--------------------------------------------------
(Address of principal executive office) (Zip Code)
(313) 274-1000
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(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes__X___ No ______
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of July 31, 1997.
Class Shares Outstanding
----- ------------------
Common Stock 2,424,924
DEARBORN BANCORP, INC.
INDEX
Part I. Financial Information:
Item 1. Financial Statements
The following consolidated financial statements of
Dearborn Bancorp, Inc. and its subsidiary included in
this report are:
Page
----
Consolidated Balance Sheets - June 30, 1998, December 31,
1997 and June 30, 1997 3
Consolidated Statements of Income - For the Three Months
Ended June 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income - For the
Three Months Ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows - For the Three
Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion of Results of Operations
and Analysis of Financial Condition, Liquidity and
Capital 7-19
Part II. Other Information:
Pursuant to SEC rules and regulations, the following
item(s) are included with the Form 10-Q Report:
Item 4. Submission of Matters to a Vote of Security
Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Pursuant to SEC rules and regulations, the following
items are omitted from this Form 10-Q as inapplicable or
to which the answer is negative:
Item 1. Legal Proceedings
Item 2. Changes in the Rights of the Corporation's
Security Holders
Item 3. Defaults by the Corporation on its Senior
Securities
Item 5. Other Information
SIGNATURES 21
2
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands) 06/30/98 12/31/97 06/30/97
(unaudited) (audited) (unaudited)
----------- --------- ----------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,707 $ 1,406 $ 2,059
Federal funds sold 6,143 254 1,300
--------- --------- ---------
Total cash and cash equivalents 8,850 1,660 3,359
Mortgage loans held for sale 5,214 347 61
Investment securities, available for sale 51,500 29,780 19,479
Loans
Loans 56,223 52,139 43,136
Allowance for possible credit losses (557) (522) (436)
--------- --------- ---------
Net loans 55,666 51,617 42,700
Bank premises and equipment, net 2,297 2,296 2,098
Accrued interest receivable 981 723 549
Other assets 281 230 140
--------- --------- ---------
Total assets $ 124,789 $ 86,653 $ 68,386
========= ========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 13,114 $ 8,587 $ 9,711
Interest bearing deposits 83,381 66,810 49,362
--------- --------- ---------
Total deposits 96,495 75,397 59,073
Other liabilities
Federal funds purchased -- 1,500 --
Mortgage payable 528 537 545
Accrued interest payable 304 310 178
Other liabilities 86 157 155
--------- --------- ---------
Total liabilities 97,413 77,901 59,951
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares
authorized, 2,424,924 and
1,044,924 shares outstanding in
1998 and 1997, respectively 28,483 10,506 9,272
Accumulated deficit (1,113) (1,689) (807)
Net unrealized gain (loss) on
securities available for sale 6 (65) (30)
--------- --------- ---------
Total stockholders' equity 27,376 8,752 8,435
Total liabilities and
stockholders' equity $ 124,789 $ 86,653 $ 68,386
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
3
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Six Months Ended
(In thousands, except share data) 06/30/98 06/30/97 06/30/98 06/30/97
--------- -------- -------- -----------
Interest income
Interest on loans $ 1,249 $ 958 $ 2,454 $ 1,827
Interest on investment
securities, available for sale 713 302 1,088 531
Interest on federal funds and
deposits with banks 152 36 267 61
----------- ----------- ----------- -----------
Total interest income 2,114 1,296 3,809 2,419
Interest expense
Interest on deposits 1,133 690 2,109 1,268
Interest on other liabilities 10 11 22 21
----------- ----------- ----------- -----------
Total interest expense 1,143 701 2,131 1,289
----------- ----------- ----------- -----------
Net interest income 971 595 1,678 1,130
Provision for possible credit losses 20 34 42 73
----------- ----------- ----------- -----------
Net interest income after provision
for possible credit losses 951 561 1,636 1,057
----------- ----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 32 29 63 59
Fees for other services to customers 5 5 12 12
Gain on the sale of loans 66 34 93 68
Gain on the sale investment
securities 3 -- 16 --
Other income 1 2 4 3
----------- ----------- ----------- -----------
Total non-interest income 107 70 188 142
Non-interest expenses
Salaries and employee benefits 399 310 761 590
Occupancy and equipment expense 95 47 191 97
Advertising and marketing 22 26 45 56
Stationery and supplies 43 13 68 30
Professional services 25 26 62 43
Data processing 25 24 53 44
FDIC insurance premiums 2 3 4 3
Other operating expenses 59 72 127 138
----------- ----------- ----------- -----------
Total non-interest expenses 670 521 1,311 1,001
----------- ----------- ----------- -----------
Income before income tax benefit 388 110 513 198
Income tax benefit (13) (35) (63) (60)
----------- ----------- ----------- -----------
Net income $ 401 $ 145 $ 576 $ 258
=========== =========== =========== ===========
Per share data:
Net income - basic and diluted $ 0.17 $ 0.14 $ 0.34 $ 0.25
Weighted average number
of shares outstanding - basic 2,318,770 1,044,924 1,685,366 1,044,924
Weighted average number
of shares outstanding - diluted 2,338,455 1,052,806 1,700,914 1,052,806
<FN>
The accompanying notes are an integral part of these consolidated statements.
4
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended Six Months Ended
(In thousands, except per share data) 06/30/98 06/30/97 06/30/98 06/30/97
-------- -------- -------- --------
Net income $ 401 $ 145 $ 576 $ 258
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses)
arising during period 75 86 89 (12)
Less: reclassification adjustment for
gains included in net income (3) -- (16) --
----- ----- ----- -----
Other comprehensive income 72 86 73 (12)
----- ----- ----- -----
Comprehensive income $ 473 $ 231 $ 649 $ 246
===== ===== ===== =====
<FN>
The accompanying notes are an integral part of these consolidated statements.
5
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands) Six Months Ended
06/30/98 06/30/97
-------- --------
Cash flows from operating activities
Interest and fees received $ 3,630 $ 2,250
Interest paid (2,137) (1,238)
Proceeds from sale of mortgages held for sale 8,205 4,720
Origination of mortgages held for sale (7,925) (4,410)
Participations purchased in mortgages held for sale (5,054) --
Cash paid to suppliers and employees (1,266) (1,025)
-------- --------
Net cash provided by (used in) operating activities (4,547) 297
Cash flows from investing activities
Proceeds from maturities of securities
available for sale 17,350 5,000
Proceeds from sales of securities available for sale 19,908 595
Purchases of securities available for sale (58,883) (14,598)
Increase in loans, net of payments received (4,091) (6,876)
Purchases of property and equipment (113) (86)
-------- --------
Net cash (used in) investing activities (25,829) (15,965)
Cash flows from financing activities
Net increase in non-interest bearing deposits 4,527 2,128
Net increase in interest bearing deposits 16,571 9,482
Decrease in federal funds purchased (1,500) --
Principal payments on mortgage payable (9) (9)
Sale of common stock, net of offerings costs 17,977 --
-------- --------
Net cash provided by financing activities 37,566 11,601
Increase (decrease) in cash and cash equivalents 7,190 (4,067)
Cash and cash equivalents at the beginning
of the period 1,660 7,426
-------- --------
Cash and cash equivalents at the end of the period $ 8,850 $ 3,359
======== ========
Reconciliation of net income to net cash provided by
(used in) operating activities
Net income $ 576 $ 258
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for possible credit losses 42 73
Depreciation and amortization expense 115 71
Accretion of discount on investment securities (9) (4)
Amortization of premium on investment securities 1 8
Gain on sale of investment securities (16) --
(Increase) decrease in mortgages held for sale (4,867) 242
(Increase) in interest receivable (258) (243)
Increase (decrease) in interest payable (6) 51
(Increase) in other assets (54) (49)
(Decrease) in other liabilities (71) (110)
-------- --------
Net cash provided by (used in) operating activities ($ 4,547) $ 297
======== ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
6
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
The financial statements of Dearborn Bancorp, Inc. (the "Corporation")
include the consolidation of its only subsidiary, Community Bank of
Dearborn (the "Bank"). The accounting and reporting policies of the
Corporation are in accordance with generally accepted accounting
principles and conform to practice within the banking industry.
The unaudited financial statements of the Corporation for the three and
six month periods ended June 30, 1998 and 1997 reflect all adjustments,
consisting of normal recurring items which are, in the opinion of
management, necessary to present a fair statement of the results for the
interim period. The operating results for the quarter are not
necessarily indicative of results of operations for the entire year.
The consolidated financial statements included herein have been prepared
by the Corporation, without an audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction
with the financial statements and notes thereon included in the
Corporation's 1997 Annual Report to Stockholders.
PART 1 - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL CONDITION
The following discussion and analysis are intended to address significant
factors affecting the financial condition and results of operations of the
Corporation. The discussion provides a more comprehensive review of the
financial position and operating results than can be obtained from a reading
of the financial statements and footnotes presented elsewhere in this report.
Certain information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations may be deemed to be
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the Act's safe harbor
provisions. These statements are based on current expectations and involve a
number of risks and uncertainties. Active results could differ materially and
adversely from those described in the forward-looking statements as a result
of various factors outside the control of the Corporation, including but not
limited to the following: the risk of non-payment of loans, changes in
prevailing economic conditions causing declines in real estate market values,
rapid changes in interest rates and the monetary and fiscal policies of the
federal government, and strong competition for deposits, loans and other
financial services from competitors.
7
General
The Corporation was formed in 1992 and the Bank was formed in 1993. Principal
operations of the Bank commenced on February 28, 1994 when the Bank opened
for business at its main office, located at 22290 Michigan Avenue, Dearborn,
Michigan. On December 20, 1995, the Bank opened its second office, located at
24935 West Warren Avenue, Dearborn Heights, Michigan. On August 11, 1997, the
Bank opened its third office, located at 44623 Five Mile Road, Plymouth
Township, Michigan.
Results of Operations
The Corporation reported net income of $401,000 and $576,000 for the three
and six month periods ended June 30, 1998, respectively, compared to net
income of $145,000 and $258,000 for the three and six month periods ended
June 30, 1997. The improvement was a factor of growth in the volume of loans
and deposits and the corresponding net interest income associated with the
increased volumes. In addition, the Corporation completed an initial stock
offering of common stock on April 8, 1998 that netted the Corporation $18.0
million in new capital which was invested in securities available for sale at
an average rate of 5.80%. See the "Capital" section of this report for
further information.
Net Interest Income
1998 Compared to 1997. Net interest income for the three month period ended
June 30, 1998 was $971,000 compared to $595,000 for the same period ended
June 30, 1997, an increase of $376,000 or 63%. This increase was caused
primarily by an increase in average earning assets of $53.3 million between
the periods while interest-bearing liabilities grew by $33.3 million. At the
same time the Corporation's interest rate spread decreased to 1.82% in 1998
from 2.66% in 1997. The Corporation's net interest margin also decreased in
1998 to 3.32% from 3.74% in 1997. However, the decreases in net interest
spread and net interest margin were offset by increases in the volume of net
earning assets. The Corporation's decrease in interest rate spread and net
interest margin was a result of selling additional shares of common stock and
investing the funds into investment securities, available for sale, until
which time the Corporation can deploy the capital into other investments or
acquisitions.
Net interest income for the six month period ended June 30, 1998 was
$1,678,000 compared to $1,130,000 for the same period ended June 30, 1997, an
increase of $548,000 or 48%. This increase was caused primarily by an
increase in average earning assets of $41.5 million between the periods while
interest-bearing liabilities grew by $30.2 million. At the same time the
Corporation's interest rate spread decreased to 2.06% in 1998 from 2.71% in
1997. The Corporation's net interest margin also decreased in 1998 to 3.32%
from 3.79% in 1997. However, the decreases in net interest spread and net
interest margin were offset by increases in the volume of net earning assets.
The Corporation's decrease in interest rate spread and net interest margin
was a result of selling additional shares of common stock and investing the
funds into investment securities, available for sale, until which time the
Corporation can deploy the capital into other investments or acquisitions. In
addition, the Corporation's decrease in interest rate spread and net interest
margin was a result of aggressive time deposit gathering at premium rates and
the direct reinvestment of those funds into investment securities with
similar interest rates until the funds could be deployed into quality loans
with higher yields.
8
Average Balances, Interest Rates and Yields. Net interest income is affected
by the difference ("interest rate spread") between rates of interest earned
on interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets
approximates or exceeds the total of interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Financial
institutions have traditionally used interest rate spreads as a measure of
net interest income. Another indication of an institution's net interest
income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
The following table sets forth certain information relating to the
Corporation's consolidated average interest-earning assets and
interest-bearing liabilities and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average daily balance of
assets or liabilities, respectively, for the periods presented. During the
periods indicated, non-accruing loans, if any, are included in the net loan
category.
Three months ended June 30, Three months ended June 30,
1998 1997
---------------------------- -----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
------- -------- ------- -------- -------- -------
Assets
Federal funds sold and interest
bearing deposits with banks $ 11,597 $ 152 5.24% $ 2,499 $ 36 5.76%
Investment securities, available
for sale 50,266 713 5.67% 19,420 302 6.22%
Loans 55,123 1,249 9.06% 41,771 958 9.17%
-------- -------- ---- -------- ------ ----
Sub-total earning assets 116,986 2,114 7.23% 63,690 1,296 8.14%
Other assets 5,868 3,646
-------- --------
Total assets $122,854 $ 67,336
======== ========
Liabilities and stockholders' equity
Interest bearing deposits $ 83,989 $ 1,133 5.40% $ 50,650 $ 690 5.45%
Other borrowings 530 10 7.55% 541 11 8.13%
-------- -------- ---- -------- ------ ----
Sub-total interest bearing
liabilities 84,519 1,143 5.41% 51,191 701 5.48%
Non-interest bearing deposits 11,050 7,700
Other liabilities 390 264
Stockholders' equity 26,895 8,181
-------- --------
Total liabilities and stockholders'
equity $122,854 $ 67,336
======== ========
Net interest income $ 971 $ 595
======== ======
Net interest rate spread 1.82% 2.66%
==== ====
Net interest margin on
earning assets 3.32% 3.74%
==== ====
9
Six months ended June 30, Six months ended June 30,
1998 1997
---------------------------- -----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
------- -------- ------- -------- -------- -------
Assets
Federal funds sold and interest
bearing deposits with banks $ 9,941 $ 267 5.37% $ 2,150 $ 61 5.67%
Investment securities, available
for sale 37,139 1,088 5.86% 17,452 531 6.09%
Loans 53,992 2,454 9.09% 40,000 1,827 9.14%
-------- -------- ---- -------- ------ ----
Sub-total earning assets 101,072 3,809 7.54% 59,602 2,419 8.12%
Other assets 6,374 3,950
-------- --------
Total assets $106,405 $ 63,552
======== ========
Liabilities and stockholders' equity
Interest bearing deposits $ 77,339 $ 2,109 5.45% $ 47,133 $1,268 5.38%
Other borrowings 540 22 8.15% 549 21 7.65%
-------- -------- ---- -------- ------ ----
Sub-total interest bearing
liabilities 77,879 2,131 5.47% 47,682 1,289 5.41%
Non-interest bearing deposits 10,713 7,402
Other liabilities 405 256
Stockholders' equity 17,408 8,212
-------- --------
Total liabilities and stockholders'
equity $106,405 $ 63,552
======== ========
Net interest income $ 1,678 $1,130
======== ======
Net interest rate spread 2.06% 2.71%
==== ====
Net interest margin on
earning assets 3.32% 3.79%
==== ====
10
Rate/Volume Analysis. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and
interest-bearing liabilities and changes in yields and rates. The table
reflects the extent to which changes in the interest income and interest
expense are attributable to changes in volume (changes in volume multiplied
by prior year rate) and changes in rate (changes in rate multiplied by prior
year volume). Changes attributable to the combined impact of volume and rate
have been allocated proportionately to changes due to volume and changes due
to rate.
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED NET INTEREST INCOME VOLUME / RATE ANALYSIS
Three months ended Six months ended
June 30, 1998/1997 June 30, 1998/1997
Change in interest due to Change in interest due to
--------------------------- ---------------------------
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
------- ------- ------ ------- -------- ------
Assets
Federal funds sold and interest
bearing deposits with banks 119 $(13) $ 116 $ 209 $ (3) $ 206
Investment securities, available
for sale 438 (27) 411 577 (20) 577
Loans 303 (12) 291 636 (9) 727
----- ---- ----- ------ ---- -----
Total earning assets $ 859 $(51) $ 818 $1,422 $(32) $1,390
===== ==== ===== ====== ==== ======
Liabilities
Interest bearing deposits $ 450 $ (7) $ 443 $ 824 $ 17 $ 841
Other borrowings -- (1) (1) -- 1 1
----- ---- ----- ------ ---- -----
Total interest bearing liabilities $ 450 $ (8) $ 442 $ 824 $ 18 $ 842
===== ==== ===== ====== ==== ======
Net interest income $ 376 $ 548
===== ======
Net interest rate spread (0.84)% (0.65)%
===== ======
Net interest margin on
earning assets (0.42)% (0.47)%
===== ======
Provision for Possible Credit Losses
1998 Compared to 1997. The provision for possible credit losses was $20,000
and $42,000 for the three and six month periods ended June 30, 1998,
respectively, compared to $34,000 and $73,000 for the same periods in 1997.
The provision for possible credit losses was based upon management's
assessment of relevant factors, including types and amounts of non-performing
loans, historical and anticipated loss experience on such types of loans, and
current and projected economic conditions.
11
Non-interest Income
1998 Compared to 1997. Non-interest income was $107,000 and $188,000 for the
three and six month periods ended June 30, 1998, respectively, compared to
$70,000 and $142,000 for the same periods in 1997, an increase of $37,000 or
53% for the three month period and an increase of $46,000 or 32% for the six
month period.. This increases were primarily due to gains on loans held for
sale and gains recognized on the sale of investment securities.
Non-interest Expense
1998 Compared to 1997. Non-interest expense was $670,000 and $1,311,000 for
the three and six month periods ended June 30, 1998, respectively, compared
to $521,000 and $1,001,000 for the same periods in 1997, an increase of
$149,000 or 29% for the three month period and an increase of $310,000 or 31%
for the six month period. The largest components of non-interest expense were
salaries and employee benefits which amounted to $399,000 and $761,000 and
occupancy and equipment expense which amounted to $95,000 and $191,000 for
the three and six month periods ended June 30, 1998, respectively. For the
same period in 1997, salaries and employee benefits were $310,000 and
$590,000 and occupancy and equipment expense were $47,000 and $97,000,
respectively. The primary factor for these increases was the opening of the
Bank's office in Plymouth Township in August 1997 and additions to staffing
in the lending department of the Bank in 1998. As of June 30, 1998, the
number of full time equivalent employees was 35 as compared to 26 as o
June 30, 1997.
Income Tax Benefit
1998 Compared to 1997. The income tax benefit was $13,000 and $63,000 for the
three and six month periods ended June 30, 1998 compared to $35,000 and
$65,000 for the same periods in 1997. The changes were due to the change in
the valuation allowance against a deferred tax asset related to net operating
loss carryforwards. As of June 30, 1998 the Corporation had released all
available valuation allowances against deferred tax assets.
Comparison of Financial Condition at June 30, 1998 and June 30, 1997
Assets. Total assets at June 30, 1998 were $124.8 million compared to $68.4
million at June 30, 1997, an increase of $56.4 million or 82%. The increase
was primarily due to increases in federal funds sold, investment securities -
available for sale and loans.
Federal Funds Sold. Total federal funds sold at June 30, 1998 were $6.1
million compared to $1.3 million at June 30, 1997, an increase of $4.8
million or 369%. The increase was primarily due to the increase in deposits.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at June 30,
1998 were $5.2 million compared to $61,000 at June 30, 1997, an increase of
$5.1 million. The increase was due to the Bank purchasing participations in
mortgage loans held for sale on June 30, 1998 in the amount of $5.1 million.
By July 15, 1998, all of the purchased participations were paid-off.
12
Investment Securities - Available for Sale. Total investment securities -
available for sale, at June 30, 1998 were $51.5 million compared to $19.5
million at June 30, 1997, an increase of $32.0 million or 164%. An increase
in the common stock and deposits has enabled the Corporation to invest in
investment securities - available for sale until such time as quality loan
opportunities or other higher yielding investments become available. All
securities within the Corporation's portfolio are U.S. treasury issues, U.S.
government sponsored agency issues or corporate debt securities carrying
ratings of Aa2 or better. The Corporation does not hold any securities in the
"Held to Maturity" category nor does the Corporation hold or utilize
derivatives.
The amortized cost and estimated market value of investments in debt
securities available for sale are as follows (in thousands):
June 30, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
US Treasury securities $ 2,001 $ 6 $ -- $ 2,007
US Government agency
securities 39,243 13 (13) 39,243
Corporate debt securities 10,250 -- -- 10,250
------- ----- ------ -------
Totals $51,494 $ 19 $ (13) $51,500
======= ===== ====== =======
June 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
US Treasury securities $ 3,006 $ 8 $ (9) $ 3,005
US Government agency
securities 16,503 8 (37) 16,474
Corporate debt securities -- -- -- --
------- ------ ------ -------
Totals $19,509 $ 16 $ (46) $19,479
======= ====== ====== =======
13
Loans. Total loans at June 30, 1998 were $56.3 million compared to $43.1
million at June 30, 1997, an increase of $13.2 million or 31%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
06/30/98 12/31/97 06/30/97
-------- -------- --------
Consumer loans $ 12,846 $ 12,705 $ 11,159
Commercial, financial, & other 11,015 10,668 7,032
Commercial real estate construction 1,623 1,746 2,490
Commercial real estate mortgages 12,425 9,796 8,122
Residential real estate mortgages 18,314 17,224 14,333
-------- -------- --------
56,223 52,139 43,136
Allowance for possible credit losses (557) (522) 436
-------- -------- --------
$ 55,666 $ 51,617 $ 42,700
======== ======== ========
The following is a summary of non-performing assets and
problems loans (in thousands):
06/30/98 12/31/97 06/30/97
-------- -------- --------
Non-accrual loans $ 44 $ 11 $ 5
Renegotiated loans -- -- --
Other real estate owned -- -- --
---- ---- ----
$ 44 $ 11 $ 5
==== ==== ====
Allowance for Possible Credit Losses. The allowance for possible credit
losses at June 30, 1998 was $557,000 compared to $436,000 at June 30, 1997,
an increase of $121,000 or 28%. The increase in the allowance for possible
credit losses was based upon management's assessment of relevant factors,
including types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current and projected
economic conditions.
14
The following is an analysis of the allowance for possible
credit losses (in thousands):
06/30/98 06/30/97
-------- --------
Balance, beginning of year $ 522 $ 366
Charge-offs:
Consumer Loans 7 3
------- -------
Net charge-offs 7 3
Additions charged to operations 42 73
------- -------
Balance, June 30 $ 557 $ 436
======= =======
Allowance to total loans 0.99% 1.01%
======= =======
Net charge-offs to average loans 0.01% 0.01%
======= =======
Average allowance for possible loan losses 539 398
Average total loans, gross 53,992 40,000
Average allowance to average total loans 1.00% 1.00%
Bank Premises and Equipment. Bank premises and equipment at June 30, 1998 was
$2.3 million compared to $2.1 million at June 30, 1997, an increase of $0.2
million or 10%. This increase reflects the Bank's investment in technology as
well as capital expenditures necessary to open the Bank's Plymouth Township
Office.
Accrued Interest Receivable. Accrued interest receivable at June 30, 1998 was
$981,000 compared to $549,000 at June 30, 1997, an increase of $432,000 or
79%. The increase was primarily due to semi-annual interest payments accrued
on investments securities available for sale.
Other Assets. Other assets at June 30, 1998 were $281,000 compared to
$140,000 at June 30, 1997, an increase of $141,000 or 100%. The increase was
due to the Bank's recognition of income tax assets.
15
Deposits. Total deposits at June 30, 1998 were $96.5 million compared to
$59.1 million at June 30, 1997, an increase of $37.4 million or 63%. The
following is a summary of the distribution of deposits (in thousands):
06/30/98 12/31/97 06/30/97
-------- -------- --------
Non-interest bearing:
Demand $13,114 $ 8,587 $ 9,711
======= ======= =======
Interest bearing:
Checking $ 2,120 $ 1,274 $ 738
Money market 10,656 6,787 5,487
Savings 1,859 1,529 1,375
Time, under $100,000 42,661 36,114 24,672
Time, $100,000 and over
Non-volatile priced 15,265 12,055 8,098
Volatile priced 10,820 9,051 8,992
------- ------- -------
$83,381 $66,810 $49,362
======= ======= =======
The increase in deposits was primarily due to normal business development,
marketing, telemarketing, referral programs and growth strategies which
included two major marketing campaigns, an annual birthday celebration in
March each year and a grand opening celebration of the Bank's Plymouth
Township branch in August, 1997. The increase in deposits enabled the
Corporation to invest the funds in loans, federal funds sold and investment
securities - available for sale.
Accrued Interest Payable. Accrued interest payable at June 30, 1998 was
$304,000 compared to $178,000 at June 30, 1997, an increase of $126,000 or
70%. The increase was due to the increase in the volume of time deposits.
16
Capital
Stockholders' equity at June 30, 1998 was $27.4 million compared to $8.4
million as of June 30, 1997, an increase of $19.0 million or 226%. The
following is a presentation of the Bank's regulatory capital ratios (in
thousands):
Minimum
To Be Well Capitalized
Minimum For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------- -----
As of June 30, 1998
Total capital
(to risk weighted assets) 10,409 17.0% 4,898 8.0% 6,123 10.0%
Tier I capital
(to risk weighted assets) 9,852 16.1% 2,448 4.0% 3,672 6.0%
Tier I capital
(to average assets) 9,852 9.4% 4,192 4.0% 5,240 5.0%
As of June 30, 1997
Total capital
(to risk weighted assets) 6,515 16.1% 3,237 8.0% 4,047 10.0%
Tier I capital
(to risk weighted assets) 6,079 15.0% 1,621 4.0% 2,432 6.0%
Tier I capital
(to average assets) 6,079 10.1% 2,408 4.0% 3,009 5.0%
Based on the respective regulatory capital ratios at June 30, 1998 and 1997,
the Bank is well capitalized.
On April 8, 1998, the Corporation completed an initial public offering of
common stock underwritten by Roney and Co. As a result of the offering, the
Corporation sold 1,380,000 shares of stock at a price of $14.00 per share and
received $18.0 million in new capital, net of offering costs. The Corporation
is also now trading on the NASDAQ Small-Cap Market under the symbol "DEAR".
Liquidity and Asset and Liability Management
Liquidity refers to readily available funds to meet the needs of borrowers
and depositors. Levels of liquidity are closely monitored in conjunction with
loan funding requirements and deposit outflows. Adequate liquidity protects
institutions from raising funds under duress at excessive expense and
provides a necessary cushion for occasional unpredictable aberrations in
demand. While adequate liquidity is imperative, excessive liquidity in lower
yielding cash investments or other easily marketable assets reduces potential
interest income. Thus, an appropriate balance must be maintained to protect
the institution and at the same time, prudently maximize income
opportunities. Sources of liquidity from both assets and liabilities includes
federal funds sold, securities available for sale, loan repayments, core
deposits and a federal funds purchase credit facility.
17
The Corporation has sought to manage its exposure to changes in interest
rates by matching more closely the effective maturities or repricing
characteristics of the Corporation's interest-earning assets and
interest-bearing liabilities. The matching of the asset and liabilities may
be analyzed by examining the extent to which the assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest
rate changes on net interest income.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the
Corporation's assets mature or reprice more quickly or to a greater extent
that its liabilities, the Corporation's net portfolio value and net interest
income would tend to increase during periods of rising interest rates but
decrease during periods of falling interest rates. If the Corporation's
assets mature or reprice more slowly or to a lesser extent than its
liabilities, its net portfolio value and net interest income would tend to
decrease during periods of rising interest rates but increase during periods
of falling interest rates.
Interest Rate Sensitivity Analysis. The matching of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest
rate sensitivity "gap." An asset or liability is said to be interest rate
sensitive within a specific period if it will mature or reprice within that
period. The interest rate sensitivity "gap" is the difference between the
amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or
repricing within that time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities, and is considered negative when the amount of interest
rate sensitive liabilities exceed the amount of interest rate sensitive
assets. During a period of rising interest rates, a negative gap would be
expected to adversely affect net interest income while a positive gap would
be expected to result in an increase in net interest income, while conversely
during a period of declining interest rates, a negative gap would be expected
to result in an increase in net interest income and a positive gap would be
expected to adversely affect net interest income.
Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and
thus changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors
as banking interest rates move. While the interest rate sensitivity gap is a
useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates. During periods of rising interest rates, the
Corporation's assets tend to have prepayments that are slower than those in
an interest rate sensitivity gap and would increase the negative gap
position. Conversely, during a period of falling interest rates, the
Corporation's assets would tend to prepay faster than originally expected
thus decreasing the negative gap position. In addition, some of the
Corporation's assets, such as adjustable rate mortgages, have caps on the
amount by which their interest rates can change in any single period, and
therefore may not reprice as quickly as liabilities in the same maturity
category.
18
The following table set forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998 which are expected
to mature or reprice in each of the time periods shown (in thousands):
Interest Rate Sensitivity Period
--------------------------------------------------
(In thousands) 1-90 91-365 1-5 Over
Days Days Years 5 Years Total
------- -------- ------- ------- -----
Earning assets
Federal funds sold $ 6,143 $ -- $ -- $ -- $ 6,143
Mortgage loans held for sale 5,214 -- -- -- 5,214
Securities available for sale 10,250 1,002 40,248 -- 51,500
Total loans, net of non-accrual 12,247 6,289 36,561 1,082 56,179
------- -------- ------- ------- --------
Total earning assets 33,854 7,291 76,809 1,082 119,036
Interest bearing liabilities
Total interest bearing deposits 19,662 47,665 16,054 -- 83,381
Mortgage payable -- -- -- 528 528
------- -------- ------- ------- --------
Total interest bearing liabilities 19,662 47,665 16,054 528 83,909
Net asset (liability) funding gap 14,192 (40,374) 60,755 554 $ 35,127
------- -------- ------- ------- ========
Cumulative net asset (liability) funding gap $14,192 $(26,182) $34,573 $35,127
======= ======== ======= =======
Year 2000 Problem
The Corporation is aware of the current concerns throughout the business
community of reliance upon computer software programs that do not properly
recognize the year 2000 in date formats, often referred to as the "Year 2000
Problem." The Year 2000 Problem is the result of software being written using
two digits rather than four digits to define the application year (i.e., "98"
rather than "1998"). A failure by a business to properly identify and correct
a Year 2000 Problem in its operations could result in system failures or
miscalculations. In turn, this could result in disruptions of operations,
including among other things a temporary inability to process transactions,
send invoices or otherwise engage in routine business transactions on a
day-to-day basis.
Operations of the Corporation depend upon the successful operation on a daily
basis of its computer software programs. The Corporation relies upon software
purchased from third-party vendors rather than internally generated software,
and based upon its ongoing discussions with these vendors, the Corporation
believes that most of its software already reflects changes necessary to
avoid the Year 2000 Problem. The Corporation expects to update during 1998
any remaining software that could be affected by the Year 2000 Problem to
eliminate remaining concerns. This update is not expected to have a material
adverse effect on the Corporation.
19
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
PART 2 - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation held its regular annual meeting of stockholders on
May 19, 1998. At this meeting, an election was held for six
directors, to serve two and three year terms expiring in 2000 and
2001. The voting results for each nominee were as follows:
Nominee Total For Total Withheld
------- --------- --------------
Dr. Robert C. Schwyn (2000) 747,570 None
Margaret I. Campbell (2001) 747,570 None
John E. Demmer (2001) 747,570 None
Michael V. Dorian, Jr. (2001) 747,460 None
Donald G. Karcher (2001) 747,570 None
Richard Nordstrom (2001) 747,570 None
In addition, the stockholders were asked to approve two proposals.
A proposal to amend the articles of incorporation to increase the
number of authorized shares of common stock from 3,000,000 to
5,000,000 shares was approved as follows: voted yes 743,339; voted
no 1,540; abstained none.
A proposal to amend the 1994 stock option plan to make available
an additional 85,000 shares of common stock for issuance under the
plan was approved as follows: voted yes 681,545; voted no 21,067;
abstained 3,383.
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) Financial Statements:
The following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are:
Consolidated Balance Sheets - June 30, 1998, December 31, 1997 and
June 30, 1997
Consolidated Statements of Income - For the Three and Six Months
Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows - For the Three and
Six Months Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
(b) A Form 8-K Report was not filed during the three months ende
June 30, 1998.
20
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dearborn Bancorp, Inc.
(Registrant)
/s/ John E. Demmer
------------------------------------
John E. Demmer
Chairman and Chief Executive Officer
/s/ Michael J. Ross
------------------------------------
Michael J. Ross
President
/s/ Jeffrey L. Karafa
-------------------------------------
Jeffrey L. Karafa
Treasurer and Chief Financial Officer
Date: August 3, 1998